MEMORANDUM OF UNDERSTANDING

In the present era, after the meeting of Heads of States or business tycoons, the
Memorandum of understanding is executed, by which the parties record the
understanding reached between them. The Memorandum is recorded with the intention
that the parties are not binding themselves at that stage and the parties feel that further
detailed deliberations are required to finalise the legal agreement. The parties agree to co-
operate and to further negotiate and finalise the agreement. As the intention of the parties
recording memorandum of understanding is not to bind themselves legally, care is taken
while drafting the
same.

1. Essential ingredients of Agreement

The Memorandum of understanding may also be binding on the parties, if it contains, all the
essential ingredients, of an agreement. Section 10, Indian Contract Act provides that all
agreements are contracts if they are made by the free consent of parties competent to contract, for
a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

2. Intention to create legal relationship is important for enforceable contract

The agreement will be enforceable, if it is made with a view to create legal relationship. In
Balfour v Balfour, the defendant who was employed in Ceylon, went to England with his wife to
enjoy the leave. On the expiry of leave, when he was about to return to Ceylon, his wife was
advised to stay in England on account. of her health. The defendant promised to his wife to pay
30 Pounds every month for her maintenance. The defendant sent the amount for some time, but
subsequently he stopped it as certain, differences between them led to their separation. By the
time of separation, the said amount had fallen into arrears, the plaintiff wife filed a suit against
the defendant to recover the arrears. The Court dismissed the suit. While rejecting the claim, Lord
Atkin observed that there are agreements between the parties which do not result in contracts
within the meaning of that term in law. The ordinary example is where two parties agree to take a
walk together, or where there is an offer and acceptance of hospitality. They are not contracts
because parties did not intend that they shall be attended by legal consequences. The Court held
that the test of determining as to, whether the parties intended to create legal relations is whether
a reasonable man would consider that the promisor intended to bind himself legally or to put it
more precisely, whether the promisor intended to contract. If at the time of making the agreement,
the parties make it clear that they do not intend to bind themselves legally, the agreement will not
constitute a contract which can be enforced in a court of law. In Rose and Frank v Crompton
Brothers, the defendant which was a British company appointed the plaintiff American company
as its sole vendor in America. One of the clause in the agreement provided that document is not a
formal one and shall not be subject to the jurisdiction of the courts in America and England. On
the termination of the agreement by the defendant company, the defendant filed a suit for
damages. The Court held that there was no binding contract between the parties and consequently
the breach of its terms did not give rise to any cause of action against the defendant. While
delivering the judgment, the Court held that to create contract, there must be a common intention
of the parties to enter into legal relations mutually communicated expressly or impliedly.

If there is a written agreement between the parties, the intention of the parties can be inferred
from the agreement and: the conduct of the parties. En Bikram Kishore Parida v Bemudhar Jena,
the Court. held that the test of an intention of the parties to effect legal relations is an objective
one. It may be that the promisor never anticipated that his promise would give rise to any legal
obligations, but if a reasonable man would consider that he intended so to contract, he will be
bound to make good his promise. The intention of the parties, as to whether they intended to enter
into a legally enforceable contract or not is primarily gathered from the terms and conditions
which are agreed by the parties.

In State of Orissa v Titagarh Paper Mills Company Ltd, the Supreme Court held that it is true that
the nomenclature ~ and description given to a contract is not determinative of the real nature of
the document or of the transaction there under. These, however, have to be determined from all
the terms and clauses of the document and all the rights and results flowing therefrom and not by
picking and choosing certain clauses. An agreement may not be enforceable as a contract, if it
was made with the express intention not to create legal relations between them, even the
agreement is supported by consideration. However the onus to prove that there was no intention
to create contract by the agreement is on the party who makes such an assertion and the onus is a
heavy one.

3. Agreement should be certain and, definite

The parties to the Memorandum of Understanding are generally not clear and certain about the
terms of their intention and they have to further negotiate for further evolution and concretization
of ideas. Therefore the Memorandum of understanding also lacks from, the definition of the
contract that the terms of the contract should be clear, certain and should not be vague. Section.
29, Indian Contract Act provides that agreements, the meaning of which is uncertain, or capable
of being made certain are not void.

4. Agreement to agree no concluded contract

As the Memorandum of Understanding normally provides that the parties agree to further
negotiate and settle the terms of the contract, there may not be concluded contract, as agreement
to agree is not concluded contract and therefore not enforceable.

5. Drafting of Memorandum of Understanding

As the intention of the parties to the Memorandum of Understanding is that, they do not bind
themselves by the same, while drafting such Memorandum, care should be taken that from the
clauses of the same, it may not be inferred that the parties have the intention to create legal
relationship. The intention of the parties should be incorporated in the Memorandum of
understanding that the parties are negotiating- and they feel that further negotiations between
them is required to formalize the terms of the agreement between them. It may also be provided
that the parties to the Memorandum will further negotiate and finalise the contract. It may also be
provided that the parties will co-operate with each other in finalizing the contract. If possible, a
time limit may be fixed for finalisation of the contract between the parties.

The Memorandum of Understanding, is drafted like an agreement with some difference, as the
intention to enter into agreement is to create legal relationship between them, whereas the
intention of the parties to the Memorandum is that they do not propose to bind themselves legally.

The parts of the Memorandum of Understanding are as under:

(i) Commencement of Memorandum.-The Memorandum commences with the name e.g. THIS
MEMORANDUM OF UNDERSTANDING.

(ii) Place.-After the name of the deed, the place of the execution of the document is stated.
Though the mentioning of the place is not necessary but as a matter of practice, the name of the
place is stated e.g. THIS MEMORANDUM IS MADE AT MUMBAL

(iii) Date of execution of Memorandum.-After the name of the deed and the place, the date on
which the Memorandum is executed is stated e.g. THIS MEMORANDUM IS MADE AT
MUMBAI ON THE TENTH DAY OF JANUARY, TWO THOUSAND AND ONE.

(iv) Recitals.-The Memorandum of understanding also contains recitals in which the background
facts preceding the execution of Memorandum are given. The recitals depict the facts, objectives
and reasons in separate paragraphs in chronological order. The words "WHEREAS" are used to
preface the recitals. The second and subsequent paragraphs of recitals begin with "AND
WHEREAS". Alternatively the words "WHEREAS" is inserted after the description clauses and
the paragraphs containing the recitals depicting the facts in chronological order are given
numbers and each paragraph does not begin with the words "WHEREAS" and "AND
WHEREAS".

(v) Testatum.-After the recitals, the testatum starts with the words "NOW IN
CONSIDERATION OF THE PREMISES, THE PARTIES HEREBY RECORD AS
FOLLOWS".

(vi) Scope of Memorandum.-After the testatum, the scope and purpose of Memorandum of
understanding is given in detail. The scope and purpose may be divided into various paragraphs
e.g. Establishment of Co-ordination committee consisting of representatives of both parties to
negotiate further terms and conditions, the function of the committee, place of meetings, the
parties will bear their own cost upto finalisation of the agreement, exclusivity or nonexclusivity
of the Memorandum, publication of terms and conditions of Memorandum, service of notice to
parties, settlement of disputes, etc.

(vii) Clause providing that the parties have no intention to bind other party.-The clause is
also incorporated in the Memorandum providing that no party shall have the intention to bind the
other party by this Memorandum of Understanding. No party shall be entitled to file a suit against
the other party, until execution of the agreement containing specific terms and conditions between
the parties.

(viii) Term of the Memorandum.-As the purpose of Memorandum-is to finalise the agreement
in specific terms between the parties, it is preferable to provide the term of the Memorandum,
during which the parties will negotiate and try to settle the terms and conditions of the agreement
to be executed between the parties. After the expiry of the term of the Memorandum, the
Memorandum comes to an end. Alternatively it is provided in the Memorandum that the
Memorandum will remain in full force for a period of six months or the execution of the
agreement between the parties or agreement of the parties to terminate the Memorandum.

(ix) Testimonium.-The testimonium is the concluding part of. the Memorandum. The
testimonium states that the parties have signed the Memorandum in witness of what is written
therein. The testimonium, is, generally in the following form:
IN WITNESS WHEREOF THE PARTIES HERETO HAVE HEREUNTO SET THEIR
RESPECTIVE HANDS THE DAY, MONTH AND YEAR FIRST ABOVE WRITTEN.

(x) Execution.-After testimonium, the Memorandum is executed by the parties to it in the

presence of witnesses.

6. Stamp duty

As the, Memorandum is a sort of agreement, the stamp duty on Memorandum will be payable in
terms of Article 5 of Schedule I to the Indian Stamp Act, 1899 as applicable to the state in which
the agreement is executed.

7. Registration

The Memorandum is not a compulsorily registrable document.

CHECKLIST

(1) Check whether the name and description of the parties executing Memorandum has been
given?
(2) Check whether the background facts, objects and reasons for execution of the Memorandum
have been given in the recitals?
(3) Check whether the scope and 'purpose of the Memorandum has been given in the
Memorandum?
(4) Check whether the clause providing that the intention of the parties is not to bind themselves
legally and no party shall have the right to file a suit for breach of the terms of the Memorandum
by the other party?
(5) Check whether the stamp duty has been paid in accordance, with the Indian Stamp Act, as
applicable in the State, in which the Memorandum is executed?

PRECEDENTS
1. MEMORANDUM OF UNDERSTANDING BETWEEN ENTREPRENEURS OF JAPAN
AND INDIA
Parties THIS MEMORANDUM OF UNDERSTANDING IS MADE AT MUMBAI
ON THIS ……………… DAY OF………………2000 Between M/s
XYZ Pic, a company incorporated and existing under the Japanese
Companies Act and having its corporate office at………………
Japan(hereinafter referred to as "XYZ") of the ONE PART and M/s ABCr
Ltd.,a company incorporated and existing under the Companies Act,1956
and having its registered office at………………Mumbai (hereinafter
referred to as "ABC") of the OTHER PART;
Recitals
WHEREAS XYZ is engaged in the business for the last 40 years in various
products in Japan and has experience and capabilities in various fields and
desirous to expand its business activities in various parts of the world;

AND WHEREAS with a view to commence business activities in India

XYZ has sent its team consisting of various experts and the said team has
negotiated with various Indian industrialists and entrepreneurs;

AND WHEREAS the said team of XYZ has negotiated with ABC, who has
 experience and capabi lities in the field of automobiles, electronic goods,
cellular and mobile phones and desires to enter into the manufacturing of the
computers and related products;

AND WHEREAS after negotiations, XYZ and ABC have desired to initiate
further negotiations for their joint collaboration for installing the
manufacturing unit/s of computers and related products and the parties are
confident that by further negotiations and dialogues between the
representatives of the parties, a long lasting business relationship will be
established between them;

AND WHEREAS the parties have desired to create a framework for

proceeding with the negotiations so that the terms and Conditions of the
Testatum agreement may be finalized and with that objective in view, they mutually
agree to act in accordance with the terms, set forth in the Memorandum of
Agreement to Understanding.
negotiate
NOW IN CONSIDERATION OF THE PREMISES, The Parties hereby
Constitution of agree as follows:
teams by the
parties 1. The parties herein agree that they will negotiate for establishment of long
lasting business relations in accordance With the terms and conditions
hereinafter mentioned

2. The parties shall constitute a negotiating team, which will consist of

six representatives out of which each party will nominate three
Functions of members. It is understood that the team leader nominated by
Negotiating team each party will be authorized to take decision on the part of the party
nominating him. The committee shall decide the rule, procedure,
frequency and place of the meeting. The leader of, the team nominated
by XYZ shall be the chairman of the said team and will chair the
meetings of the committee.

3. The negotiating team shall make study of the market conditions of both
Cost and countries, cost effectiveness and other factors for the establishment of
expenses to be factory in India for the manufacturing of the computer and related products
shared in joint collaboration. The said team shall decide the place where the
proposed factory will be located. The terms and conditions of the proposed
Appointments joint collaboration between the parties will be finalized by the negotiating
of consultants team. The negotiating team shall also prepare blue print 'for the
establishment of the factory in joint collaboration in India. The negotiating
'team shall be authorized to appoint consultants for undertaking studies and
to give opinion to the

4. Each party will bear all costs wd expenses incurred by it in relation to this
Memorandum, which Includes travel expenses, overheads, establishment of
Parties not to office in each other country, and other expenses which may be incidental in
establish connection with this Memorandum team.
relationship with
other parties 5. If the Negotiating Team appoints consultants for undertaking studies and
 to give opinion, the expenses in connection with the appointment of such
consultants will be borne by the ABC in the first instance and 50% of the
Services of said expenses will be reimbursed by XYZ on submission of the bill. The bill
notices and to be submitted by ABC will provide the details of expenses incurred by it in
correspond once connection with the appointment of specialists, along with the copy of the
between the bills/receipts obtained by the ABC and the XYZ shall reimburse the 50%
Parties expenses within 15 days from the date of receipt of the bill by it.

6. The parties agree that it and its , associates/affiliates shall not directly or
indirectly negotiate with any other party in connection with the
establishment of a factory in joint collaboration in India. It is also agreed that
the parties shall not negotiate with any other party for the establishment of
business relations in India or Japan without the written consent of the other
party.

7. All notices and correspondence shall be in writing and may be sent by

sending the same by registered airmail or by facsimile transmission to the
Information to other side, at its address set forth herein below or at such other address ,as
be kept secret such other party may subsequently notify. All such notices shall be deemed
to have been given or served when delivered.
Tenure of MOU XYZ PIC
Postal Address:
Telephone No.
Facsimile No.
Memorandum Kind Attention
not assignable ABC Ltd.,
Postal Address
Settlement of Telephone No.
disputes Facsimile No.
Kind Attention

Obligation of 8. No party shall disclose any information to third party concerning the
parties will matters relating to this Memorandum, unless the final agreement is executed
survive ,on between the parties.
termination
9. This Memorandum shall remain in full force for a period of six months
Not to create from the execution of these presents. However this Memorandum will
legal terminate on the execution of agreement between the parties or an agreement
Relationship to terminate, this Memorandum.

10. This Memorandum is not assignable and no party to this Memorandum

shall be authorized to assign this Memorandum.
Testimonium
11. In the event of any difference or dispute arising out of the interpretation
or in connection with this Memorandum, the parties shall consult each other
and the Managing Directors of both the parties will decide the matter by
Execution holding. a meeting either at Japan or at Mumbai.

12. The obligations of the parties under clauses of this Memorandum shall
survive, the termination or expiration of this Memorandum
 13. It is hereby expressly made clear that the intention of the parties is
not to create binding agreement between the, parties and no party shall
have the right to file claim against the other party for breach of the
terms of this Memorandum. The parties understand that neither this
Memorandum. .,gives any right to any party nor it creates a
partnership, joint collaboration or any other entity.

IN WITNESS WHEREOF, the parties have caused this Memorandum to be

executed through their authorized representatives on the day and year first
above written.

Signed and delivered by the within named XYZ Pic through the hands of
Shri……………… its authorised official in the presence of
1
2.

Signed and delivered by the within named ABC Ltd. through the hands of
Shri……………… its authorized official in the presence of
1
2
2. MEMORANDUM QF UNDERSTANDING BETWEEN INDUSTRIALIST'S OF
DIFFERENT COUNTRIES TO DIVERSIFY THEIR ACTIVITIES QF BUSINESS
Parties THIS MEMORANDUM OF UNDERSTANDING IS MADE AT MUMBAI
ON THIS ………………DAY OF………………2000 Between Ws XYZ
PIc, a company incorporated and existing under the German Companies Act
and having its corporate office at ................... Germany (hereinafter referred
to as "XYZ") of the ONE PART and M/s ABC Ltd., a company incorporated
and existing under the Companies Act, 1956 and having its registered office
at………………Mumbai(hereinafter referred to as "ABC") of the OTHER
PART;
Recitals
WHEREAS the parties are in the business for the last 20 years and have
experience and capabilities in the field of business of manufacturing of
various. products and have factories in various parts of the world;

AND WHEREAS the parties intend Ito explore the possibilities and
opportunities that exist In the countries of both the parties and to diversity
their business activities and with that Intention desire to join their skills,
experience and resources;

AND WHEREAS with the said intention, the representatives of XYZ have
come over to Mumbai to negotiate with ABC and felt that they agree in
principle to co-operate and to further negotiate and finalise the business
relations between the parties to establish factories in India or in Germany in
joint collaboration;

Testatum AND the Parties herein desire to record their understanding and to agree for
 a programme for further negotiation for establishment of long lasting
business relationship between the parties In the manner set forth in this
Constitution of Memorandum;
working group
by the parties NOW IN CONSIDERATION OF THE PREMISES, THE PARTIES
HEREBY RECORD THEIR UNDERSTANDING AS FOLLOWS.

(1) The Parties shall constitute a Working Group consisting , of 4 persons,

out of which each party will nominate two representatives within a period of
15 days from the date, of execution, of these presents. The representatives
nominated by the parties shall have the authority to represent and bind
appointing party, In all mafters1hat come before it. The working group shall
Functions of the establish the rule, procedure, frequency and place of meeting. XYZ shall
working group while nominating its representatives shall, nominate the person out of two
persons nominated by it, to act as chairman of the Working Group ,The
Working Group shall submit a joint report every month to both the parties
about the progress made by it and the parties will have right to give
suggestions to the Working Group relating to the functioning and working of
Sharing of costs the Group.
and expenses
(2) The Working Group appointed by the parties shall act to achieve the
objectives of this Memorandum and will try to finalise the blue print of the
Appointment of business/s, which may be established by both the parties in India or
consultant and Germany. The said group may also appoint consultants and advisors to help
advisors them in coming to a conclusion about the business activities to be conducted
by the parties.

(3) Subject to the provisions of clause (4), all expenses and costs incurred by
a party in relation to the Memorandum shall be borne and paid by the party
incurring the same and the other party will not be liable to reimburse the
Service of expenses incurred by it.
notice to the
parties (4) The costs and. expenses incurred by the Working Group relating to
the appointment. of consultants and advisors will be borne by ABC,
and 50% of the said costs and expenses, will be reimbursed by the
No party shall XYZ to ABC. The ABC will submit a bill for reimbursement of the
keep relationship costs and expenses to XYZ along with the details and copies of the
with other
bills/receipts relating thereto. XYZ will make the payment of the bill
parties
to ABC within 15 days from the date of the receipt of ,the said bill..
Tenure of
memorandum (5) Any letter or notice required to be sent or required to be made under this
Memorandum shall be in writing, signed by the authorised representative of
the party giving such notice, and shall be sent by facsimile transmission or
Information to by registered air mail to the other party at its address set forth herein above
be kept secret or at such other address as such other party may subsequently notify.

(6) Both the parties agree that it and its associates or affiliates shall not
Obligation of associate individually or in combination with others, directly or indirectly
parties relating to the subject matter of this Memorandum, except with the consent
of the other party.
No Intention to
bind other party (7) This Memorandum shall remain in force for one year from the date of
these presents or the execution of an agreement between the parties or
agreement of the parties to terminate or otherwise withdraw from this
Memorandum.

Testimonium (8) The parties agree that the release and contents of all public
announcements, other than when such disclosure is required under any law,
relating to this Memorandum shall be made by any party with the prior
written approval of the other party.

(9) The obligations of the Parties under clauses of this Memorandum are of
binding nature and shall survive the termination or expiration of this
Memorandum.
Execution
(10) It is made clear that the Parties have no intention to bind each other by
this Memorandum and no party will have the right to file any claim against
the other party for the breach of the Memorandum. It is specifically made
clear that by this Memorandum, the Parties do not intend to create a
partnership, joint venture or collaboration or any company or any other
entity of whatsoever nature.

IN WITNESS WHEREOF THE PARTIES HAVE CAUSED THIS

MEMORANDUM TO BE EXECUTED THROUGH THEIR
AUTHORISED REPRESENTATIVES on the day and year first hereinabove
written.

Signed and delivered by the within named XYZ Pic. through the hands of
Shri……………… its authorised official
In the presence of

Signed and delivered by the within named ABC Ltd., through the hands of
Shri ……………its authorized official in the presence of
1.
2.